Readers of my column know how much I love preferred stocks. These stock-bond hybrids offer yields that wipe out anything that bonds can offer, even junk bonds. They are safer than junk bonds in most cases, with ratings that often exceed those of junk. They trade like bonds, in fairly tight ranges. Preferred stocks also offer security in being just behind bondholders should a company need to liquidate. The common stock dividend of a company must be cut first before cutting that of a preferred issue, and most preferred stock is cumulative, meaning the company must pay out all the dividends that have accrued since any suspension if it ever starts paying out again.
Investors should be careful about some very high-yielding preferred stocks, such as those in the energy sector. Those yields are crazy because the preferred stock price has fallen significantly, as the market doubts whether the underlying companies will remains solvent. However, the solvency of these three preferred stocks seems pretty secure in the near future: Barclays PLC (ADR)’s (NYSE:BCS) Preferred 8.125% Non-cumulative Series D, Arbor Realty Trust Inc’s (NYSE:ABR) 8.25% Series A Cumulative Redeemable and Ladenburg Thalman Financial Services’ (NYSE:LTS) Series A 8% Cumulative Preferred.